Third-Quarter GDP Surprises On The Upside - November 7, 2013

Will the surprises never end? Indeed, it seems as though they won't. That is because after weeks of fretting that third-quarter gross domestic product, the report of which had been delayed for more than a week by the earlier government shutdown, would show growth of less than 2%, the Commerce Department earlier this morning indicated that growth, in its initial, or flash, estimate for the period, came in at a 2.8% rate.

That increase was not only materially better than the 1.8%-2.0% forecast, but it also was dramatically above the opening-period 1.1% gain and slightly ahead of the second-quarter GDP increase of 2.5%.

It should be noted that the third-quarter advance estimate released this morning is based on source data that are incomplete and therefore subject to revision by the government. Actually, there will be two revisions to this initial estimate, coming later this month and in late December. Such revisions could dramatically alter the outlook.

Meanwhile, the increase in real GDP in the latest three months primarily reflected positive contributions from personal consumption expenditures, private inventory investment, exports, residential fixed investment, nonresidential fixed investment, and state and local government outlays. Conversely, GDP was held back by another drop in U.S. government spending.

Also, the acceleration in third-quarter GDP from the second quarter primarily reflected a decline in imports and accelerations in inventory building and state and local government spending. Moreover, the price index for gross domestic purchases increased by 1.8% last quarter, which was well above the second-quarter rate.

Importantly, this was the best GDP advance since the first quarter of last year, when GDP had increased by 3.7%. By comparison, growth had been nearly extinguished in the fourth quarter of 2012, rising by a scant 0.1%. For now, we believe GDP will take a step back in the final quarter of this year, when we would look for an increase of no more than 2%, and possibly less than that figure, reflecting the impact of the 16-day partial government shutdown in early October.

Overall, this was a solid report, and it affirmed that the expansion, despite some nicks and scrapes along the way is alive and well, and should continue unabated in the current period and in 2014.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.